1 / 6

Chapter 20. The Financial System

Chapter 20. The Financial System. Homework: . Anatomy of a Financial Crisis, p. 576 ff. Speculative bubble Heavily leveraged financial institutions become insolvent Falling confidence contaminates otherwise healthy financial institutions, leading to ‘fire sales’ Credit crunch

vinny
Download Presentation

Chapter 20. The Financial System

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 20. The Financial System Homework:

  2. Anatomy of a Financial Crisis, p. 576 ff. Speculative bubble Heavily leveraged financial institutions become insolvent Falling confidence contaminates otherwise healthy financial institutions, leading to ‘fire sales’ Credit crunch Recession as loans to do business are no longer available Vicious circle feeds on itself Reference to Rogoff and Reinhart “This Time is Different” (2009). There is a suggestion that recessions due to financial crises are different from those that arise from ‘normal’ declines in investment, gov’t spending, etc. Decline is more rapid, recovery is slower.

  3. Figure 20-1. p. 578. The TED Spread

  4. Figure 20-2, p. 580. Anatomy of a Financial Crisis

  5. Who should be blamed for the financial crisis of 2008-09? (pp. 580-81) • Federal Reserve: (kept interest rates too low, encouraging borrowing and housing investments. • Home buyers: were reckless, gambled, defaulted • Mortgage brokers pushed excess borrowing • Investment banks: bundled mortgages (mortgage backed securities) and sold them, often to sophisticated borrowers • Rating agencies; operated on dubious assumptions • Government regulators: Politicians had encouraged home buying (reduction of interest rates, Fannie Mae and Freddie Mac) • Policy makers who pushed home ownership, subsidized mortgages through tax deductions, and discouraged effective regulation, including via Fannie Mae and Freddie Mac • Is he avoiding criticizing academic economists?

  6. Policy Response in the US: (pp. 581-82) • Countercyclical monetary and fiscal policy • Limited by liquidity trap, size of deficit/debt • Fed as Lender of Last Resort • “Propped up Financial System” (bailed out commercial and shadow banks – also, GM and Chrysler) • Reduce excessive risk taking: Dodd-Frank Act • More Effective Regulation. Note the asymmetry in terms of the crisis starting in the US, then contaminating European markets, where the damage has been larger. Of course, theirs is also a ‘sovereign debt’ crisis, which is structurally different.

More Related